Despite the recent market downturn, we at Lightspeed continue to be upbeat about investing in healthcare. While the past few months showed significant volatility and loss of value on the public markets across both biotech and healthtech, we’d like to share a few thoughts and observations that continue to drive our conviction in the sector.
To start, our philosophy on healthcare investing at Lightspeed is simple. Our focus is on the central stakeholder in healthcare — patients — and the innovations across the sector that can improve their quality of life. True patient impact, whether from improved therapies or better delivery of care, will invariably lead to value. On a fundamental level, we believe the scale of opportunity to better patient lives continues to outstrip our current ability to do so.
Healthcare system coming out of Covid
Disease doesn’t stop for an economic downturn — especially not for one impacted by a global pandemic. The demand for healthcare is inelastic, creating a reliable opportunity to innovate and improve care. Cancer was as prevalent and as inadequately treated during the pandemic as it is after. More broadly, the vast majority of care has not only rebounded to but is exceeding pre-pandemic levels (Figure 1).
M&A going strong in life sciences
Investment-wise, it’s important to level-set ourselves to the appropriate comparative year. Both 2020 and 2021 were unusual years for all. Compared to 2019, however, 2022 is on track to outpace 2019 in the absolute number of acquisitions (Figure 2).
This is not surprising, as SVB Leerink estimates that eighteen large-cap biopharmas will collectively have more than $500 billion in cash on hand by the end of 2022, representing more than $1.7 trillion of M&A capacity when incorporating the ability to leverage existing assets to borrow capital.
Pharmas keen to counteract future revenue declines
With pharmas looking to reinvigorate their pipelines in the face of patent cliff-driven revenue loss, we expect them to tap into these cash reserves relatively soon (Figure 3).
We also expect a large part of deal-making to be in the form of licensing or acquiring not entire companies but individual assets — as in the case of AstraZeneca’s acquisition of T2, a subsidiary of Lightspeed portfolio company Ancora Biotech which developed a CD3/CD19 bispecific antibody. TeneoBio, Ancora’s predecessor, was one of the pioneers of using an LLC structure to allow the sale of specific assets. This enables individual assets to be sold separately without having to sell the entire company. The sale of the T1 asset to Abbvie in 2021 is a good example of this approach. Business models that enable one-off licensing deals encourage greater M&A.
Public biotech company valuations starting to rebound
As for public companies, the XBI index, despite recent volatility, is back to roughly pre-pandemic levels (Figure 4). Notably, the decline in valuations was sharpest in those companies that went public last year, many of which were preclinical and wouldn’t have gone public under historical conditions (Figure 5).
Healthcare venture capital fundraising on pace to beat even 2021
Since 2020, more than $60 billion has been raised by funds for healthcare venture capital, with 2022 currently on pace to beat even last year’s record-setting high (Figure 6).
Many new venture capital funds especially those with tech orientation
Among the funds raised, there are a number of new players in the space, with 50 new tech-focused funds that are allocating between 5–15% of their funds to healthtech opportunities and more to tech-enabled therapeutics. Many of these are less enthusiastic about traditional therapeutics deals.
While funds are often purely healthtech focused, or on the flipside, only invest in therapeutics,, Lightspeed straddles both approaches — and in startups that can’t be clearly defined into either camp. In 2015 we invested in Forty Seven out of Stanford, which was a more traditional therapeutic deal. Forty Seven ultimately was sold to Gilead for $4.9 billion in 2020. In 2016, we invested in TeneoBio, which used in silico screening for its bispecific antibody platform. TeneoBio was acquired by Amgen in 2021 in addition to other assets acquired by Abbvie and AstraZeneca. Lightspeed led Guardant’s Series C round in 2015, after which the company went on to achieve the first FDA-approved liquid biopsy test for solid tumors. And on Aug. 25, Lightspeed participated in a $40 million Series A for 3T Biosciences, which is leveraging a platform that combines high-diversity target libraries with active machine learning to identify the most immunogenic T-cell receptor targets in solid tumors.
Lightspeed expands its commitment to healthcare and life science investing
With more than 20 companies in our portfolio across novel therapies, diagnostics, healthtech and tools, Lightspeed has only accelerated its commitment to healthcare and life sciences investing. There are a number of sector developments we are excited about:
- The $100 genome, enabled by Lightspeed portfolio company Ultima Genomics, will revolutionize medicine through low-cost genetic sequencing for diagnostics, R&D and treatment.
- Novel therapeutic modalities — from multispecific antibodies (Ancora Biotech) to antibody drug conjugates (Kirilys Therapeutics) to molecular glues (Triana Biomedicines), next-generation cell therapies (Orca Bio, 3T Biosciences, Abata Therapeutics) and tissue therapeutics (Satellite Bio).
- Next generation patient stratification (D2G Oncology), enabled by the confluence of interdisciplinary advances across biology and computation, will finally begin to realize the potential of precision medicine at scale.
- Creative care models continue to develop, from digital therapeutics (Freespira) to virtual care (Wheel).
- Maturation of computational firepower and modern infrastructure technology are up-leveling key health IT and services layers underlying the majority of US healthcare spend, of which $750 billion is estimated to be wasteful.
Healthcare continues to be an attractive sector for future investment
The combination of inelastic demand for healthcare and the massive room for improvement in both treatments and delivery of care present opportunities for immense patient impact — and in turn, value to founders and investors. Furthermore, regulatory bodies are showing sophisticated positions on both drug prices (as evidenced by the approval for Bluebird’s $2.8M gene therapy) and reimbursement for care (as evidenced by reimbursement values for innovative delivery models like chronic care management and expanding social determinants of health benefits).
With so many fundamental tailwinds, Lightspeed is confident that the future of healthcare investing looks bright. We look forward to seeing everyone in person at JPM and to advance our collective goal to meaningfully impact patient lives.
Written by the Lightspeed Healthcare Investing Team
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